Europe's Post-Crisis Welfare State Could Be a Model for the World

The eurozone crisis has unleashed a string of buzzwords - from rating downgrade to Grexit, referring to Greece's potential exit from the zone. Yet one word is often missing: economic equality. Distinguishing the European Union from the rest of the capitalist world is its social-welfare programs, and the crisis threatened to upend that broadly equitable economic system. But three years into the crisis Europe seems to have bitten the bullet and found a path to reforms that could allow the eurozone to maintain its social welfare state, albeit modified.

In the tumult of crisis and escape du jour, trends defining not only the future of the eurozone, but economic globalization, may have been overlooked.

Analyses and comments seldom mention that the countries in South European used membership of the eurozone as a cover. They borrowed to boost artificially high living standards. Profiteering creditors, both inside and outside the Europe, supported the unsustainable economic models. Greece borrowed from all-too-willing German and French banks to spend beyond its means. Cyprus adopted an irresponsible banking system, accounting for more than one third of its gross domestic product, more or less similar to offshore financial centers in the Caribbean, without scrutinizing origins of deposits from dubious investors. The eurozone rescued Cyprus after investments in Greek bonds failed, but penalized the investors. The financial world cried foul play, predicting a run on banks in Italy, Spain, Portugal and beyond.

But those banks bear little resemblance to those in Cyprus, and crisis may have been spurred by a few to protect profits.

As calm eventually returns for Cyprus, and even sooner for Greece, citizens and investors alike will realize they are better off inside the eurozone than outside. Exiting the eurozone would have confined them to permanent low growth before, during and after the crisis.

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Joergen Oerstroem Moeller

Eurozone

European Union

Adjustment policies for the weakest member states are working. In 2007 Italy, Spain, Portugal and Greece all ran substantial deficits on the balance of payments. Now they are all close to balancealbeit with Greece a bit behind - see graph. Wage and benefit costs have fallen dramatically since 2008 inter alia by 36 percent in Ireland, 22 percent in Spain and 17 percent in Greece. The trend throughout Europe is for shrinking budget deficits with the eurozone deficit cut from 6.2 percent in 2009 to 3.5 percent in 2012, with 2.3 percent forecast for 2013.

More fascinating, eurozone policies may be the most significant socioeconomic experiment since the introduction of the welfare state more than 60 years ago.

The welfare state brought to Europe a high degree of social and income equality. The Gini index measures the degree of inequality in the distribution of family income; higher numbers signify greater inequality: 0.307 for the EU, 0.34 for the UK, 0.45 for the US, according to the CIA World Factbook. Economists disagree on inequality's effect on economic growth - some argue it promotes growth, others insist it's a barrier, but most would like to live in a country with a high degree of income equality as one of the main indicators for a high score on the human development index.

The Europeans should have known, but instead suppressed what the global economic recession disclosed: Revenues can no longer finance the generous welfare benefits. Privileges have allowed too many people to work too little, earning too much. Demographics turned against the welfare model, with a higher share of the population aged 65 years or more and a shrinking share of people working and paying. Eventually, investors, taxpayers and other cash cows revolted. Political power began to reflect the limits of how much the productive part of society could and would pay.

The reaction was astounding, a loud chorus pronouncing the death of the welfare model. But the doomsayers have since been proven wrong as the Europeans have launched a social economic enterprise around three pillars:

Joergen Oerstroem Moeller is a visiting senior research fellow with the Institute of Southeast Asian Studies, Singapore, and adjunct professor with the Singapore Management University & Copenhagen Business School.